Abstract

http://ssrn.com/abstract=1750094
 
 

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Oligopoly as a Socially Embedded Dilemma: An Experiment


Christoph Engel


Max Planck Institute for Research on Collective Goods; University of Bonn - Faculty of Law & Economics; Universität Osnabrück - Faculty of Law

Lilia Zhurakhovska


Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

November 2011

MPI Collective Goods Preprint, No. 2011/1

Abstract:     
From the perspective of competitors, competition may be modeled as a prisoner’s dilemma. Setting the monopoly price is cooperation, undercutting is defection. Jointly, competitors are better off if both are faithful to a cartel. Individually, profit is highest if only the competitor(s) is (are) loyal to the cartel. Yet collusion inflicts harm on the opposite market side and, through the deadweight loss, on society at large. Moreover, almost all legal orders combat cartels. Through the threat with antitrust intervention, gains from cooperation are uncertain. In the field, both qualifications combine. To prevent participants from using their world knowledge about antitrust, we experimentally test them on a neutral matrix game, with either a negative externality on a third participant, uncertainty about gains from cooperation, or both. Uncertainty dampens cooperation, though only slightly. Surprisingly, externalities are immaterial. If we control for beliefs, they even foster cooperation. If we combine both qualifications and do not control for beliefs, we only find an uncertainty effect. If we add beliefs as a control variable, we only find that externalities enhance cooperation, even if gains from collusion are uncertain. Hence the fact that the dilemma of oligopolists is socially embedded matters less than one might have expected.

Number of Pages in PDF File: 42

Keywords: oligopoly, collusion, negative externalities, uncertainty, prisoner’s dilemma, experiment

JEL Classification: C72, C91, D03, D22, D43, D62, D81, H23, K21, K42, L13, L41

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Date posted: January 31, 2011 ; Last revised: November 11, 2011

Suggested Citation

Engel, Christoph and Zhurakhovska, Lilia, Oligopoly as a Socially Embedded Dilemma: An Experiment (November 2011). MPI Collective Goods Preprint, No. 2011/1. Available at SSRN: http://ssrn.com/abstract=1750094 or http://dx.doi.org/10.2139/ssrn.1750094

Contact Information

Christoph Engel (Contact Author)
Max Planck Institute for Research on Collective Goods ( email )
Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany
+049 228 914160 (Phone)
+049 228 9141655 (Fax)
HOME PAGE: http://www.coll.mpg.de/engel.html

University of Bonn - Faculty of Law & Economics
Postfach 2220
D-53012 Bonn
Germany
University of Osnabrueck - Faculty of Law
c/o Prof. Dr. Schneider
Osnabruck, D-49069
Germany
Lilia Zhurakhovska
Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )
Kurt-Schumacher-Str. 10
Bonn, 53113
Germany
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